What Is Purchase APR and How Does It Work?
Grasp Purchase APR: the core interest rate on credit card spending. Understand its function, what shapes it, and how to manage your credit effectively.
The Annual Percentage Rate (APR) represents the yearly cost of borrowing money through a credit card. It is expressed as a percentage and primarily reflects the interest rate applied to outstanding balances. Understanding purchase APR is important for managing credit card debt and avoiding unnecessary interest charges.
What Purchase APR Means
Purchase APR is the specific interest rate applied to new purchases made with a credit card. It is the rate charged on any outstanding balance if the cardholder does not pay their total statement balance by the payment due date. While the APR is an annual rate, interest is commonly calculated on a daily or monthly basis using this annual percentage. This rate is the primary interest charge most consumers encounter when using their credit cards.
How Purchase APR Works
Purchase APR is typically applied using the “average daily balance” method. To calculate interest, credit card issuers determine a daily periodic rate by dividing the annual APR by 365. They then calculate the average daily balance by summing the daily balances for each day in the billing cycle and dividing by the number of days. Interest begins to accrue on new purchases after the grace period if the full statement balance is not paid by the due date. If the entire statement balance is paid in full by the due date, no interest is charged on new purchases.
Factors Affecting Your Rate
Several factors influence the specific purchase APR an individual receives. Creditworthiness, largely reflected by one’s credit score, is a significant determinant; a higher credit score can lead to a lower APR. Many APRs are variable, meaning they can change over time based on an index such as the prime rate. As the prime rate fluctuates, so too can variable APRs. The specific credit card product and the issuer’s internal policies also play a role in setting the initial and ongoing purchase APR.
Using the Grace Period
A grace period is a designated timeframe between the end of a credit card’s billing cycle and the payment due date during which interest is not charged on new purchases. To take advantage of this, the cardholder must pay the entire statement balance in full by the payment due date. A grace period typically does not apply if there is an outstanding balance from a previous billing cycle; in such cases, interest may accrue from the date of new purchases. Federal regulations mandate that credit card issuers provide at least 21 days between the billing cycle close and the payment due date for a grace period to apply.
Other Common APRs
Beyond the purchase APR, credit cards often feature several other types of Annual Percentage Rates. A cash advance APR applies to cash withdrawals made with the card; this rate is typically higher than the purchase APR and usually does not include a grace period, meaning interest accrues immediately. Balance transfer APR is the rate applied to debt moved from one credit card to another. While some balance transfers may offer an introductory lower rate or 0% APR for a promotional period, a standard rate will apply afterward to any remaining balance.
A penalty APR is a significantly higher interest rate triggered by violations of the cardholder agreement, such as making late payments or exceeding the credit limit. This elevated rate can be applied to both existing balances and future purchases, and it often remains in effect until the cardholder demonstrates a period of consistent, on-time payments.